India Stocks Get Another Downgrade On Slowing Growth, This Time By Goldman Sachs

Indian stocks were "tactically" downgraded to neutral from overweight by Goldman Sachs within its Asia/emerging market allocation, due to slower economic growth and corporate profits, it said.

While the structural positive case for India remains intact, economic growth is cyclically slowing down across many pockets, strategists at the global brokerage said in a note on Oct. 23.

Worsening earnings sentiment, an accelerating pace of earnings cuts and a weak start to results season “indicate a flow-through to corporate earnings,” it said. High valuations and a less supportive backdrop could limit near-term upside, it said.

This downgrade comes after domestic stocks got downgraded to 'underweight' by Bernstein Research as it sees the market to be "quite vulnerable" in the near term.

“We think a large price correction is less likely, given support from domestic flows, but markets could time correct over the next three to six months,” Goldman Sachs said.

Foreign investors pulled out a record amount of money from the Indian stock market in October, topping the outflow in Asia.

Foreign institutional investors have been net sellers for the 17th consecutive day and have offloaded nearly Rs 97,500 crore since Sept. 27, according to provisional data from NSE.

The benchmark indices, NSE Nifty 50 and BSE Sensex, have fallen by about 5.56% and 5.33%, respectively, in the last 17 days after the key gauges hit fresh highs.

The brokerage lowered its 12-month target for Nifty to 27,000 from 27,500 previously, implying 10% upside from Tuesday’s close.

Current valuations of 24 times forward earnings for MSCI India are at their prior peaks, Goldman Sachs said. "History suggests muted 3m and 6m returns when starting valuations are high and earning are seeing downgrades."

Additionally, ongoing Middle East tensions, the impact of regional market rotation, SEBI measures to regulate index derivatives and large upcoming equity supply could constrain near-term upside in markets, it said.

Concerns about a slowing economy also weighed global funds as the tax collection saw a dip last month. Gross Goods and Services Tax collection growth in September reached 6.5%, marking a 40-month low. The output growth of the eight core sectors declined in the latest reading.

Further, the second quarter earnings of Nifty companies will likely remain flat, and any margin tailwinds are likely to retreat due to a high base, triggering more caution for investors eyeing the fastest growing major economy.

Goldman Sachs remains 'overweight' on autos, telcos, insurance and upgraded realty, and internet stocks to 'overweight'. The brokerage downgraded cyclicals like industrials to 'market-weight', and cement, chemicals and financials to 'underweight'.